Econimics Merger Between Aol A Essay

1780 words - 7 pages

This paper focuses on the proposed merger between America Online Inc. and Netscape Communications Corporation. It presents an overview of the two companies prior to the merger, identifies the issue/issues at hand, presents an in-depth analysis, and suggests alternatives using course concepts. Overview America Online Inc., based in Dulles, Virginia, is the world's leader in branded interactive services and content. The company provides two worldwide Internet online services, America Online and CompuServe, with approximately 16 million members. Other branded Internet services operated by America Online Inc. include AOL.COM, Digital City Inc., AOL NetFind, ICQ, and others. Netscape was founded in April 1994, and currently employs more than 2000 people in 17 countries. The organization has been described as "the fastest growing software company in history." Scores of individuals and companies large and small use Netscape software to host and manage Internet sites on the World Wide Web. More specifically, companies are now using Netscape for their intranets. The Netscape software line includes four families of products: · Netscape Communicator client software suite · Netscape SuiteSpot and FastTrack servers · Netscape Development Tools · Netscape Commerce Applications At the present, Netscape Communications is a supplier of AOL Inc. Netscape is upstream from AOL; Netscape supplies its Internet browser (Netscape Navigator or Netscape Communicator) to AOL. AOL is being charged a fee for the use of Netscape's product. This fee is based both on a fixed and a variable component.Netscape is currently undervalued as a company, but has valuable technology and resources that AOL can incorporate into its offering to its consumers. America Online's proposed $4 billion acquisition of Netscape would offer a graceful and lucrative exit for an Internet pioneer that's been foundering for a year. This will give AOL a chance to advance its position in the browser/content market. Furthermore, It would also fortify AOL's arsenal against an increasingly aggressive foe: Microsoft.Analysis and Recommendations The main issue of concern is whether or not it is beneficial for AOL to keep on using the market as opposed to vertically integrating with Netscape. First of all, it may be argued that market firms can achieve economies of scale. As Netscape specializes in the production of its products, such as Netscape Navigator, it can achieve greater scale, and thus lower unit costs, than can the downstream firms that use the input. This is so because Netscape can aggregate the demands of many potential buyers, whereas a vertically integrated firm typically produces for its own needs. This assumption is based on the premise that a firm that builds its ability to self-manufacture for its internal needs would lack the necessary skills and be distracted in selling the excess product to outside firms. In this case, AOL is acquiring...

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